Active management, an inefficient form of foreign aid?

Last week Norges Bank Investment Management NBIM (the body responsible for the management of Norway’s sovereign wealth fund) held its first ever research conference in Oslo. One of the speakers was Professor Ken French of the Tuck School of Business at Dartmouth College in the US who you will find mentioned a number of times in our book. A well known advocate of the use of ‘passive’ management, Professor French was interviewed by a local paper concerning his views on NBIM’s use of active management for a proportion (roughly 10%) of the ‘Oil Fund’, as it is commonly known.

NBIM has stated that it believes that as a major global investor, it should play a role in helping to set prices in global markets. The head of the ‘Oil Fund’, Yngve Slyngstad, previously stated that as one of the world’s largest investors that they couldn’t be a freerider and leave the evaluation of what are fair prices for companies to others. When confronted with this defence of active management, Professor French’s response was to smile and dismiss NBIM’s defence with the response that if an investor wishes to engage in charitable giving through active management, that’s okay but that he wasn’t sure that it was the most effective form of foreign aid!

Whilst the debate as to passive vs active management continues (we believe this to have been clearly answered in favour of passive management), NBIM’s belief deserves serious questioning from another angle.

Jack Bogle, the founder of Vanguard, one of the largest fund companies in the world and a noted proponent of passive investment management, has stated that he believes one of the major challenges for markets today to be the lack of long-term investing. Back in the 1950’s the proportion of US equities owned by individuals was far higher than that owned by institutions. Today the situation has been completely reversed. Bogle believes that the majority of investors in the 1950s were happy to be long-term investors collecting regular dividends from their investments but rarely selling their holdings. This provided companies with a stable investor and capital base in sharp contrast to markets today where companies are focussed on the delivery of quarterly figures which impress markets and may be decisive in determining just how large executive compensation is.

It strikes us that the ‘old fashioned’ passive approach is decidedly more desirable in terms of the development of a stable economy and thus as far as society is concerned, perhaps a more stable approach. Surely given that NBIM already operates with a ‘Socially Responsible’ screening process for its investment, it should question whether its continued participation in the active buying and selling of investments goes against social responsibility and thus ought to be foregone, whether or not it feels it can generate any extra return from these activities (something which the figures show after costs it fails to do)?